Filing summary
Period and context: The filing is Estée Lauder Companies Inc.’s Form 10-K for the fiscal year ended June 30, 2015, not a standalone fiscal 2014 fourth-quarter filing. The company sells prestige skin care, makeup, fragrance and hair care products in more than 150 countries and territories through a portfolio of owned and licensed brands.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $10.780 billion | $10.969 billion |
| Gross profit / margin | $8.680 billion / 80.5% | $8.811 billion / 80.3% |
| Operating income / margin | $1.606 billion / 14.9% | $1.828 billion / 16.7% |
| Net earnings attributable to Estée Lauder | $1.089 billion | $1.204 billion |
| Diluted EPS | $2.82 | $3.06 |
| Cash from operating activities | $1.943 billion | $1.535 billion |
| Cash used for investing / financing | $1.616 billion / $895 million | $512 million / $857 million |
| Cash and cash equivalents at year-end | $1.021 billion | $1.629 billion |
| Total debt | $1.637 billion | $1.343 billion |
| Working capital | $2.333 billion | $2.769 billion |
Gross margin improved modestly as cost of sales declined to 19.5% of sales from 19.7%. Operating margin fell as operating expenses rose to 65.6% of sales from 63.6%, reflecting capability-building and acquisition costs, store expansion and the effect of the prior-year sales timing shift. The effective tax rate declined to 29.9% from 32.0%.
Changes versus the prior year
- Reported sales fell 2%; management said sales would have grown 6% excluding approximately $519 million of unfavorable currency translation and the $357 million year-over-year comparison impact from retailer orders accelerated into FY2014 ahead of the July 2014 systems rollout.
- Reported operating income declined 12%. Excluding the accelerated-order comparison, operating income would have increased 2%; the company’s adjusted, non-GAAP operating income was $1.739 billion versus $1.736 billion, with adjusted diluted EPS of $3.05 versus $2.95. These measures exclude specified timing and other items and are not GAAP results.
- Makeup sales rose 2% and hair care sales rose 3%; skin care fell 6% and fragrance fell 1%. Makeup artist and luxury brands generally performed better, while Estée Lauder and Clinique faced challenging comparisons and weaker sales in certain markets.
- Operating cash flow increased, supported by working-capital movements, including better collections and lower inventory. Investing outflows rose substantially due mainly to purchases of investments and acquisitions.
Liquidity, capital allocation and unusual items
- The company had $917.8 million in short- and long-term available-for-sale investments at year-end, after changing its cash investment strategy. Management said cash, operating cash flow, credit availability and market access were expected to support planned needs. About $1.694 billion of cash and investments was held offshore under its permanent-reinvestment strategy; repatriation could incur additional taxes.
- Debt-to-capitalization increased to 31% from 26%, primarily after issuing $300 million of 4.375% senior notes due 2045. The $1.0 billion revolving credit facility had no borrowings at year-end; there was no commercial paper outstanding at year-end. The company reported $220 million of commercial paper outstanding on August 14, 2015.
- FY2015 repurchases under the authorization totaled approximately $927.7 million; dividends declared were $0.92 per share, compared with $0.78 in FY2014. A further $175 million of repurchases occurred after year-end through August 14, 2015.
- Four acquisitions—RODIN olio lusso, Le Labo, Editions de Parfums Frédéric Malle and GLAMGLOW—had aggregate acquisition-date fair value of about $437 million. Earn-outs and other contingent consideration are payable based partly on future performance.
- Venezuela remeasurement charges were $5.3 million in FY2015 and $38.3 million in FY2014, with no tax benefit provided. The Coach fragrance license expired in June 2015, subject to limited sell-through rights.
- Management reported that KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of June 30, 2015.
Outlook, commentary and risks
Management’s FY2016 priorities include emerging-market growth, revitalizing heritage brands, product innovation, digital and omnichannel development, store expansion, and productivity and savings from the Strategic Modernization Initiative. The filing discusses guidance ranges for FY2016 and the September 2015 quarter but the supplied filing text does not provide clear numerical ranges.
Management cited slower retail growth in Hong Kong and China, weaker spending by Russian and Brazilian travelers, strong U.S. dollar effects and lower Korean travel-retail sales amid the MERS outbreak. It also noted economic instability in Russia, Greece and Brazil. Other material risks include intense competition, changing consumer preferences, retailer concentration and credit exposure, reliance on travel retail, foreign-exchange volatility, supply-chain or systems disruption, cybersecurity, acquisition integration, regulation and litigation. Lauder family members held approximately 87% of voting power, and the company relied on controlled-company exemptions from certain NYSE governance requirements.
Important facts for investors to verify
- Reconcile reported growth and margins with the SMI-related accelerated orders, currency effects and management’s non-GAAP adjustments.
- Assess whether operating cash flow and working-capital improvement are sustainable, given the timing effects described by management.
- Review acquisition earn-out obligations, integration outcomes and the growth and profitability of recently acquired brands.
- Monitor debt, planned buybacks and dividends alongside offshore cash, contingent commitments and future investment needs.
- Track exposure to currency, travel-retail and geopolitical conditions, especially in China, Hong Kong, Korea, Russia and Brazil, and the concentration of voting control.